The scope of their current licenses does NOT enable them to provide “pixie dust” to bless another (3rd party) business applications.   The value of the customer relationship is between the Application vendor of record and the paying customer, the OS (is acting as an enabler) and the retailers (are acting as a conduit to connect that value), and taking their % for that middleman role.  

One blogger suggested that an OS or device vendor or retailer could choose to contact Lodsys and purchase a license on behalf of its application ecosystem, but so far such discussions haven’t taken place. From Lodsys’ perspective, it is seeking to be paid value for rights it holds and which are being used by others.  Economically, the best return is probably to license each Application vendor for a piece of value, rather than to include in a “buyout” for an OS vendor. 

Through the magic of software and computational power, its possible to have steps automated or abstracted down to simple implementation.  But underneath the surface (easy to implement), there are some details to understand.

There are four types of Intellectual Property (IP):  Copyright (software, music, video, books…etc.), Trademark (logo, brand), Trade Secret (like the way Apple does certain things and the Coca Cola recipe), and Patents (inventions).  These various forms of IP have different aspects of how they generate value, from exclusivity or letting others have under specific licensing terms.  The United States, and virtually every other country in the world, have agreed to forms of IP as a legal or constitutional construct as a way to reward creators for creating, and not just having the value taken for free, or cloned.

Dan Abelow is an independent inventor who visualized/created metaphors, documented for the world to see (in exchange for exclusivity) and created value for doing so.  This ideation, as expressed in the patent, enabled a building block for others to build on and create more value.  Like an app developer writing software (a copyright), he created intellectual property (in this case, a patent).  

Many industries study the IP landscape prior to releasing a product or service and either design around or acquire necessary patent rights if they need them to do their solution.  Usually these industries have significant capital at risk to build and/or market, so they have an economic rationale to invest resources up front to understand and clear IP rights.  Oil companies do not drill on land where they don’t have the rights.  Movies aren’t released that don’t clear all the music rights.  Clothing manufacturers license logos from Disney or the NFL to include them in their product.   

Historically, the tech industry did not clear patent rights in advance because the amount of time and effort to do so made no economic sense given the relative low cost to create software and the speed at which products were being released… so a norm has arisen where it’s build and ship now, and worry about clearing the patent rights later.

Now, many tech companies large and small dedicate a portion of their product or services cost to building or acquiring necessary rights.   In some cases, like Apple, they do significant R&D to create their own intellectual property advantages, either to keep exclusively or to license to others (and get economic value for the effort).  Sometimes it necessary to license 3rd party patent rights to enable certain functionality.  For instance, Apple pays license fees for audio compression, video compression and the SD card slot. 

Sometimes the value of hardware, software and patent rights are bundled together for an easier way to acquire them, sometimes certain software or rights are separately available, and not in the bundle.  For convenience, its nice when the bundle includes all necessary rights.  Although sometimes, people don’t want to buy a bundle and they want to buy a la carte because it makes more economic sense for only those using the functionality to buy versus buying for everyone.  Music is a case where consumers moved away from the bundle of a CD towards singles, so that they could buy just the ones that they wanted/needed.  

In a multi-function world, where there are many functionalities included in a product or service, there may be additional IP elements that need to be licensed.  There may only be select application vendors who use certain functionality, but many who do not.  Also, the rights holder may choose to sell into a bundle, or may choose to sell a la carte.

The app vendor relies on IP laws to get paid, and gets to choose whether their app is sold a la carte, or in a bundle, and by which means (retailer, direct…etc).  And of course, these patent rights have a similar set of conditions (except when argued that patents shouldn’t because its inconvenient to take a license or to pay).  Yet every major technology product cycle from agriculture, mining, radio, television, and even into the current mobile handset/network world has dealt with patent considerations. 

The rational approach for a rights holder is to economically get value for any/all users of the rights and with the lowest sales cost as possible.  Using lawyers and litigation to sue is the most expensive way to sell.  However companies are reluctant to pay unless they have to (and thus the force of litigation sometimes being necessary).

There is a misalignment in the market where the litigation costs greatly influence the incentives.  At the low end, the cost of litigation exceeds the value of the license and this puts strong pressure on small vendors to take a license rather than litigate.  However, above a certain threshold, there is a perverse incentive for the larger market players to not pay (even if they should) and to force the rights holder into litigation since the higher expenses of litigation and the risk may knock out the need to pay. This cost of doing business often means that individual inventors cannot afford to attempt to license (or they don’t have the expertise), and so they sell to companies that specialize in rights licensing and which have the economic reserve to deal with the litigation costs and/or they partner with contingency law firms. Ironically, contingency law firms take a % that is in the range of what Apple and Amazon charge to retail digital goods.

From a fairness perspective, we have decided that  Lodsys should attempt to license all users of the patent rights, on proportional terms, rather than let many “free riders” not pay while only selected companies pay.

Surprisingly, no one has asked this question in the Internet dialog.  

In order to accurately assess the usage and to scope the relevant product revenue (by product or service using, within the United States), it usually is a custom sales dialog between Lodsys and the potential licensee.   The portfolio actually has several different “fields of use”, so the amounts vary depending on the company and its usage.  Some companies have multiple products, multiple fields of use, and complicated economic models to price.  For the direct licensees we’ve had so far, this dialog to correctly ascertain relevant product revenue and fields of use, has been effective to get to a mutually agreeable license, without litigation.  

In the case of an Application doing an in-application upgrade (and only this scenario), Lodsys is seeking 0.575% of US revenue over for the period of the notice letter to the expiration of the patent, plus applicable past usage.  So on an application that sells US$1m worth of sales in a year, the licensee would have an economic exposure of $5,750 per year.

One of the blogs (FOSS patents) speculated that Lodsys sent “cease and desist” letters… actually, the letters were “notice” letters informing companies of usage and requesting to engage in a licensing discussion.  Lodsys wants people to use the rights in their products and services, not to stop using it.  Our goal is to popularize the technology, have it used by many people and to make relatively small amounts per licensee, but to have the large volume of licensees aggregate to be a worthwhile business. 

No, Lodsys is methodically selling its product (patent rights) in the most efficient means it can.  There is a consistent pricing model, so what a small licensee has paid for their license will proportionally align to the pricing that a potential large licensee such as the companies in the February 11, 2011 litigation would pay.

Ideally, we can sell as much as possible through direct sales, rather than having to use litigation.  It’s less expensive and more efficient for both parties.

Making something, and selling something are different art forms.  Patent licensing is a difficult business to do well.  An inventor like Dan Abelow would have a difficult time focusing on what he does best, which is creating and inventing, if he had to spend his time selling, or managing selling.  Realistically, he doesn’t have the skills, nor the time, nor the economic means to do so.  That said… his value still should be compensated by the market.  

The money that Intellectual Ventures paid Dan enabled him to focus on his next set of creations and inventions, which will hopefully create new productivity for the world.

Intellectual Ventures provided a value for companies that took licenses for the bundle of patent rights that they have aggregated.  Some of that value flowed to Dan Abelow and other inventors (or institutions that owned the patents in the case of companies and universities) for their creation.  It is reasonable to assume that some of that value went to Intellectual Ventures investors, management and staff who took the time to aggregate the valuable collection of rights.

Lodsys is specializing in selling rights efficiently in a manner that likely does not make sense for Intellectual Ventures to do.  Lodsys is seeking an economic return to sell the lawfully acquired rights, providing work and income for people and doing all the same steps as any other tech company to solve a problem and to make money. 

In aggregate, this cycle of patent licensing means that more invention can happen and it means that the economic profit pie is distributed more efficiently to suppliers of building blocks that are incorporated in the products or services.  

In an ideal world, there will be a more efficient marketplace than litigation, or direct sales, or aggregation and then direct sales in order to acquire all the necessary patent rights. 

But for an app developer to take a year or two to write an application and to see money from the app, is good fortune built on top of the contributions of the entire shared ecosystem, including independent inventor’s patent outputs such as Abelow’s.

The patents were issued and recognized as invention from a patent application filed in August of 1992. It is all too easy to look back with 18.5 years of hindsight, and knowledge of how the market has evolved, and say “of course this is how everyone is going to do it” or “the patents are too broad.”  
A: No.  Lodsys will communicate directly through this blog, on this website.